Thank you Mario Draghi. The president of the European Central Bank has pledged to do whatever it takes to save the euro, and investors are already feasting on the prospects.
The mere expectation that an even deeper crisis will be averted has helped kick off a powerful rally here in the United States as well. On Friday, July 27, the S&P 500 finished at its highest levels in nearly three months.
Indeed, during the past seven weeks, the market has been repeatedly shifting course, staging sharp multi-day drops and then sharp mini-rallies. Still, the net result is a bullish one, as investors have come to embrace the likelihood that European policy makers will come up with a fix.
Trouble is, a number of other concerns have popped up, and you need to keep your enthusiasm in check.
As we head into August, here are five key headwinds that investors need to keep in mind. Chances are, the investing herd will fixate on one or several of these factors as we head into what is typically the slowest trading month of the year.
1. A lackluster earnings season portends more weakness to come.
Roughly 60% of S&P 500 companies that reported results have trailed consensus sales forecasts.
Of greater concern, the ratio of companies lowering their guidance to those raising it is -6.4%, according to Bespoke Investment Research. This means that for every 100 companies raising their guidance, 106 lowered them. That's the lowest reading since the fourth quarter of 2008. The raising/lowering trend has been negative for four straight-quarters, after nine straight-quarters of positive trends.
Unfortunately, earnings season has a few more weeks to run, and if this trend continues into mid-August, investors may have more reasons to sell than to buy.
Analysts have started to update their models to reflect the incipient weakness, but they may not have gone far enough. "Estimates have come down 3% since the start of reporting season and 5% since the start of the year. However, consensus still remains well above our estimates, especially for fourth quarter," note Merrill Lynch analysts.
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